OG&E 2014 Annual Report Download - page 30

56 OGE Energy Corp. OGE Energy Corp. 57
Plan Investments, Policies and Strategies
The Pension Plan assets are held in a trust which follows an
investment policy and strategy designed to reduce the funded status
volatility of the Plan by utilizing liability driven investing. The purpose
of liability driven investing is to structure the asset portfolio to more
closely resemble the pension liability and thereby more effectively
hedge against changes in the liability. The investment policy follows
a glide path approach that shifts a higher portfolio weighting to fixed
income as the Plan’s funded status increases. The table below sets
forth the targeted fixed income and equity allocations at different
funded status levels.
World ex-US Index is the benchmark for comparative performance
purposes. The Morgan Stanley Capital International All Country World
ex-US Index is a market value weighted index designed to measure
the combined equity market performance of developed and emerging
markets countries, excluding the United States. All of the equities
which are purchased for the international portfolio are thoroughly
researched. Only companies with a market capitalization in excess of
$100 million are allowable. No more than five percent of the portfolio
can be invested in any one stock at the time of purchase. All securities
are freely traded on a recognized stock exchange and there are no
over-the-counter derivatives. The following investment categories are
excluded: options (other than traded currency options), commodities,
futures (other than currency futures or currency hedging), short sales/
margin purchases, private placements, unlisted securities and real
estate (but not real estate shares).
For all domestic equity investment managers, no more than
eight percent (five percent for mid-cap and small-cap equity managers)
can be invested in any one stock at the time of purchase and no more
than 16 percent (10 percent for mid-cap and small-cap equity
managers) after accounting for price appreciation. Options or financial
futures may not be purchased unless prior approval of the Company’s
Investment Committee is received. The purchase of securities on
margin is prohibited as is securities lending. Private placement or
venture capital may not be purchased. All interest and dividend
payments must be swept on a daily basis into a short-term money
market fund for re-deployment. The purchase of any of the Company’s
equity, debt or other securities is prohibited. The purchase of equity or
debt issues of the portfolio manager’s organization is also prohibited.
The aggregate positions in any company may not exceed one percent
of the fair market value of its outstanding stock.
Plan Investments
The following tables summarize the Pension Plan’s investments that
are measured at fair value on a recurring basis at December 31, 2014
and 2013. There were no Level 3 investments held by the Pension Plan
at December 31, 2014 and 2013.
(In millions) December 31, 2014 Level 1 Level 2
Common stocks
U.S. common stocks $201.4 $201.4 $ —
Foreign common stocks 31.3 31.3 —
U.S. Government obligations
U.S. treasury notes and bonds (A) 203.2 203.2 —
Mortgage-backed securities 20.6 — 20.6
Bonds, debentures and notes (B)
Corporate fixed income and other securities 167.1 — 167.1
Mortgage-backed securities 19.3 — 19.3
Commingled fund (C) 25.1 — 25.1
Common/collective trust (D) 29.9 — 29.9
Foreign government bonds 7.2 — 7.2
U.S. municipal bonds 3.5 — 3.5
Interest-bearing cash 0.2 0.2 —
Preferred stocks (foreign) 1.2 1.2 —
Forward contracts
Receivable (foreign currency) 11.3 — 11.3
Payable (foreign currency) (15.6) — (15.6)
Total Plan investments $705.7 $437.3 $268.4
Receivable from broker for securities sold 3.2
Interest and dividends receivable 3.9
Payable to broker for securities purchased (33.0)
Total Plan assets $679.8
(In millions) December 31, 2013 Level 1 Level 2
Common stocks
U.S. common stocks $236.8 $236.8 $ —
Foreign common stocks 39.3 39.3 —
U.S. Government obligations
U.S. treasury notes and bonds (A) 159.8 159.8 —
Mortgage-backed securities 50.3 — 50.3
Bonds, debentures and notes (B)
Corporate fixed income and other securities 110.6 — 110.6
Mortgage-backed securities 22.3 — 22.3
Commingled fund (C) 29.2 — 29.2
Common/collective trust (D) 26.0 — 26.0
Foreign government bonds 4.0 — 4.0
U.S. municipal bonds 2.0 — 2.0
Interest-bearing cash 0.1 0.1 —
Forward contracts
Receivable (foreign currency) 1.1 — 1.1
Payable (foreign currency) (1.1) — (1.1)
Total Plan investments $680.4 $436.0 $244.4
Receivable from broker for securities sold 11.5
Interest and dividends receivable 3.2
Payable to broker for securities purchased (40.2)
Total Plan assets $654.9
(A) This category represents U.S. treasury notes and bonds with a Moody’s Investors
Services rating of Aaa and Government Agency Bonds with a Moody’s Investors
Services rating of A1 or higher.
(B)
This category primarily represents U.S. corporate bonds with an investment grade
rating at or above Baa3 or BBB- by Moody’s Investors Services, Standard & Poor’s
Ratings Services or Fitch Ratings.
(C)
This category represents units of participation in a commingled fund that primarily
invested in stocks of international companies and emerging markets.
(D) This category represents units of participation in an investment pool which primarily
invests in foreign or domestic bonds, debentures, mortgages, equipment or other trust
certificates, notes, obligations issued or guaranteed by the U.S. Government or its
agencies, bank certificates of deposit, bankers’ acceptances and repurchase
agreements, high grade commercial paper and other instruments with money market
characteristics with a fixed or variable interest rate. There are no restrictions on
redemptions in the common/collective trust.
The three levels defined in the fair value hierarchy and examples of
each are as follows:
Level 1 inputs are quoted prices in active markets for identical
unrestricted assets or liabilities that are accessible by the Pension Plan
at the measurement date. Instruments classified as Level 1 include
investments in common and preferred stocks, U.S. treasury notes and
bonds, mutual funds and interest-bearing cash.
Level 2 inputs are inputs other than quoted prices in active markets
included within Level 1 that are either directly or indirectly observable
at the reporting date for the asset or liability for substantially the full
term of the asset or liability. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets and quoted prices for
identical or similar assets or liabilities in markets that are not active.
Instruments classified as Level 2 include corporate fixed income and
other securities, mortgage-backed securities, other U.S. Government
obligations, commingled fund, a common/collective trust, U.S.
municipal bonds, foreign government bonds, a repurchase agreement,
money market fund and forward contracts.
Level 3 inputs are prices or valuation techniques for the asset or
liability that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market
activity). Unobservable inputs reflect the Plan’s own assumptions about
the assumptions that market participants would use in pricing the asset
or liability (including assumptions about risk).
Projected Benefit Obligation Funded Status Thresholds <90% 95% 100% 105% 110% 115% 120%
Fixed income 50% 58% 65% 73% 80% 85% 90%
Equity 50% 42% 35% 27% 20% 15% 10%
Total 100% 100% 100% 100% 100% 100% 100%
Within the portfolio’s overall allocation to equities, the funds are
allocated according to the guidelines in the table below.
Asset Class Target Allocation Minimum Maximum
Domestic All-Cap/Large Cap Equity 50% 50% 60%
Domestic Mid-Cap Equity 15% 5% 25%
Domestic Small-Cap Equity 15% 5% 25%
International Equity 20% 10% 30%
The Company has retained an investment consultant responsible
for the general investment oversight, analysis, monitoring investment
guideline compliance and providing quarterly reports to certain of the
Company’s members and the Company’s Investment Committee. The
various investment managers used by the trust operate within the
general operating objectives as established in the investment policy
and within the specific guidelines established for each investment
manager’s respective portfolio.
The portfolio is rebalanced at least on an annual basis to bring the
asset allocations of various managers in line with the target asset
allocation listed above. More frequent rebalancing may occur if there
are dramatic price movements in the financial markets which may
cause the trust’s exposure to any asset class to exceed or fall below
the established allowable guidelines.
To evaluate the progress of the portfolio, investment performance is
reviewed quarterly. It is, however, expected that performance goals will
be met over a full market cycle, normally defined as a three to five year
period. Analysis of performance is within the context of the prevailing
investment environment and the advisors’ investment style. The goal
of the trust is to provide a rate of return consistently from three percent
to five percent over the rate of inflation (as measured by the national
Consumer Price Index) on a fee adjusted basis over a typical market
cycle of no less than three years and no more than five years. Each
investment manager is expected to outperform its respective
benchmark. Below is a list of each asset class utilized with appropriate
comparative benchmark(s) each manager is evaluated against:
Asset Class Comparative Benchmark(s)
Core Fixed Income Barclays Capital Aggregate Index
Interest Rate Sensitive
Fixed Income Barclays Capital Aggregate Index
Long Duration
Fixed Income Barclays Long Government/Credit
Equity Index Standard & Poor’s 500 Index
All-Cap Equity Russell 3000 Index
Russell 3000 Value Index
Mid-Cap Equity Russell Midcap Index
Russell Midcap Value Index
Small-Cap Equity Russell 2000 Index
Russell 2000 Value Index
International Equity Morgan Stanley Capital Investment ACWI ex-US
The fixed income managers are expected to use discretion over the
asset mix of the trust assets in its efforts to maximize risk-adjusted
performance. Exposure to any single issuer, other than the U.S.
government, its agencies, or its instrumentalities (which have no limits)
is limited to five percent of the fixed income portfolio as measured by
market value. At least 75 percent of the invested assets must possess
an investment grade rating at or above Baa3 or BBB- by Moody’s
Investors Services, Standard & Poor’s Ratings Services or Fitch
Ratings. The portfolio may invest up to 10 percent of the portfolio’s
market value in convertible bonds as long as the securities purchased
meet the quality guidelines. A portfolio may invest up to 25 percent of
the portfolio’s market value in private placement, including 144A
securities with or without registration rights and allow for futures to be
traded in the portfolio. The purchase of any of the Company’s equity,
debt or other securities is prohibited.
The domestic value equity managers focus on stocks that the
manager believes are undervalued in price and earn an average or
less than average return on assets, and often pays out higher than
average dividend payments. The domestic growth equity manager will
invest primarily in growth companies which consistently experience
above average growth in earnings and sales, earn a high return on
assets, and reinvest cash flow into existing business. The domestic
mid-cap equity portfolio manager focuses on companies with market
capitalizations lower than the average company traded on the public
exchanges with the following characteristics: price/earnings ratio at or
near the Russell Midcap Index, small dividend yield, return on equity
at or near the Russell Midcap Index and an earnings per share growth
rate at or near the Russell Midcap Index. The domestic small-cap
equity manager will purchase shares of companies with market
capitalizations lower than the average company traded on the public
exchanges with the following characteristics: price/earnings ratio at or
near the Russell 2000, small dividend yield, return on equity at or near
the Russell 2000 and an earnings per share growth rate at or near the
Russell 2000. The international global equity manager invests primarily
in non-dollar denominated equity securities. Investing internationally
diversifies the overall trust across the global equity markets. The
manager is required to operate under certain restrictions including:
regional constraints, diversification requirements and percentage of
U.S. securities. The Morgan Stanley Capital International All Country